June 6, 2013
Did you know that in the U.S. there are more babies born during the summer than any other season of the year? It’s one of the reasons that demand for professional childcare reaches a peak during the summer. So, it’s a good time to remind everyone about FSA enrollment. For families who have just given birth – or are about to welcome a new member to their household – this edition of The Legal Review will share a simple tip worth as much as $1,500.
A couple gave birth to their first child on April 19. In early May, they began working with a local placement agency to find a nanny so the mom could go back to work after Memorial Day. With about a week to spare, they found the perfect nanny. As the family worked with the agency to finalize the employment paperwork for their nanny, the family’s placement counselor provided them with information about their tax and payroll obligations as a household employer and shared the good news about tax breaks. The family told her that they had not enrolled in their company’s Flexible Spending Account but would do so in the subsequent year.
Having read through the Expert Advice section of our website, the counselor remembered that there were some special opportunities to enroll in the middle of the year if you just had a baby. So, she advised the family to talk to their HR people as soon as possible.
Families with childcare expenses are entitled to tax breaks to help offset some of the costs. There is no income restriction on the tax breaks, so all families qualify as long as their children are under age 13 and both spouses are working, looking for work or are full-time students.
The most lucrative tax break is the Dependent Care Account (also referred to as “Flexible Spending Account” or “FSA” as part of a company’s “Cafeteria Plan”). If one of the spouses has access to this benefit, the family will be able to pay for up to $5,000 of childcare expenses using pre-tax dollars. That means the family has no taxes on that portion of their income. This benefit saves most household employers between $2,100 and $2,300 per year, depending on the state they live in and their marginal tax rate.
Enrollment in the FSA is limited to once a year (most companies do open enrollment in the fall for the subsequent tax year). However, there is a 30-day window after “life-changing events” where the family can enroll mid-year and the birth of a child is one of the qualifying events. If families miss that window, they can still take advantage of the Child and Dependent Care Tax Credit when they file their federal income tax return. However, this tax break saves a maximum of $600 per year for families with one child or $1,200 per year for families with two or more children.
Upon speaking to the HR person, the family learned more about the 30-day window for life-changing events and they were able to enroll in the FSA program for the current tax year. Given the family’s marginal tax rate, they will be able to take advantage of $2,100 in tax savings for the 2013 tax year.
Without that tip from the counselor, the family would have missed the enrollment window, which would have forced them to settle for the Child and Dependent Care Tax Credit’s $600 worth of tax savings. That $1,500 of additional savings will pay for a lot of diapers and baby food!
How to Ensure Families Maximize their Tax Savings
Unfortunately, it is extremely common for families to miss out on enrolling in an FSA after the birth of a child. As first-time parents become first-time employers, there is a lot of new information to process and 30 days is not a lot of time to know everything about being a household employer.
That’s why we offer a New Employer Orientation free of charge. This 10-minute, no-pressure, no-obligation phone call allows a Breedlove & Associates tax expert to assess a family’s unique situation and provide guidance on all the tax and labor law issues that will come into play for them. Whether they decide to use our comprehensive payroll, tax and HR service or not, this guidance will likely save them thousands of dollars and dozens of hours.
May 9, 2013
The summer months are right around the corner and many families are already planning their vacation schedule. For those who take their nanny along to watch the kids, this edition of The Legal Review addresses a common labor law mistake.
The Kellogg family hired a nanny through a local placement agency to care for their three sons. The family needed someone who would be able to travel with them for at least two vacations during the summer. The agency was able to set the Kelloggs up with an ideal nanny who was eager to accept the position, in part because she had never been out of the state before and liked the idea of traveling to new places. The agency also recommended the family call Breedlove & Associates because traveling with a nanny can be tricky for families unfamiliar with labor law. The Kelloggs politely declined as Mr. Kellogg had worked in financial services his whole life and felt comfortable handling the nanny’s payroll and taxes.
The first family vacation was a week-long trip to Disney World. The nanny was excited to go and assumed she would have some free time of her own. To her surprise, she worked much more than normal – instead of her normal 40 hour workweek, she worked 60 hours in Orlando. However, she didn’t complain because most of her days were spent riding rides and playing games with the kids.
Upon returning from the trip, the nanny was exhausted. When she received her paycheck, she was surprised to find it was $300 less than her normal pay. When she read over her paystub, she noticed a $300 deduction for airfare. The nanny did not think this was correct, but before bringing it to Mr. Kellogg’s attention, she contacted her placement agency who referred her to Breedlove & Associates.
When accompanying an employer on a trip – whether a vacation or a business trip – an employee must be compensated for all hours worked during the trip, including the time spent traveling to the destination. If the employee’s working time exceeds 40 hours in a 7-day period, the employer must pay the employee for the overtime hours at the time-and-a-half rate. In addition to the regular and overtime pay, the employer is responsible for the employee’s traveling expenses, including airfare and hotel accommodations. These expenses are covered by the employer because the employee would not have incurred these expenses on her own.
A traveling employee does not need to be compensated during her “free time,” which is defined as time when she is not responsible for her charges and she has complete freedom to go and do whatever she pleases.
A Breedlove & Associates consultant explained to the nanny that Mr. Kellogg had not handled her compensation for the trip correctly, but that this was a common mistake for new household employers. The consultant informed the nanny that she should have been paid for all hours worked and that Mr. Kellogg should not have deducted the expense of the flight from her paycheck.
The nanny presented this information to the Kelloggs and they were surprised and embarrassed to find out they had underpaid her. They apologized and explained to the nanny that it was never their intention to swindle her out of any additional money owed to her. Mr. Kellogg prided himself on paying the nanny “on the books,” but admitted he was not an expert in employment law.
Mr. Kellogg contacted Breedlove & Associates on the advice of the nanny to figure out how much he needed to pay her. We helped him calculate the additional compensation owed to the nanny for the trip and explained more about household labor law so he would be prepared for the next family vacation. The Kelloggs made a catch-up payment to the nanny right away and ultimately decided to sign up for our service so they would never risk making a similar mistake again.
How the Whole Thing Could Have Been Avoided
If the Kelloggs had called Breedlove & Associates from the beginning – as their agency recommended – we could have helped save them the embarrassment of underpaying their nanny. Luckily the employment relationship between the Kelloggs and their nanny did not suffer from this incident, but their situation illustrates how easy it is to make a mistake with payroll or labor law.
That’s why Breedlove & Associates prides itself on staying on top of any changes in the law that might affect household employers. And why we are willing to provide each and every family with a free phone consultation. It’s easier and less expensive to handle everything correctly from the beginning and we’re always here to help!
April 22, 2013
Today is Earth Day – a great reminder that we all need to continually look for ways to be more eco-friendly in our day-to-day activities. Here at Breedlove & Associates, we decided several years ago to transform the way we deliver our service in order to radically reduce our use of paper and postage.
It’s working. Through electronic tax filings, e-delivery of paystubs and our online filing cabinet, we’re proud to say that only 1% of our clients receive paper paystubs and tax returns and our printing and postage usage has dropped to less than 10% of what it used to be.
We’re not stopping there. Employees paid through Breedlove can now opt to receive Form W-2 online (instead of by snail mail). This effort will get us very close to paperless – so we can celebrate Earth Day every day.
April 19, 2013
Tomorrow, April 20, is National Nanny Training Day and it’s an important day for caregivers who want to get the most out of their job. Between 1,500 and 2,000 professionals will participate in 38 events across 18 states hosted by local agencies. We’re very excited to see so many nannies committed to improving their profession because their efforts will undoubtedly trickle down to positively benefit the families they work for and the children they care for.
So kudos to all the nannies who will attend National Nanny Training Day events and to the agencies that will host! You’re all doing your part to increase the professionalism of the childcare industry and, most importantly, making a difference in the lives of so many kids.
April 10, 2013
The April 15 tax filing deadline is less than a week away and many household employers are racing to get their taxes filed on time. Along with their personal 1040 and Schedule H, household employers also need to make sure they are taking advantage of the Child and Dependent Care Expenses tax credit (IRS Form 2441) if they qualify. According to the most current IRS statistics from 2010, only 7 million people file this form nationwide.
Families qualify to file Form 2441 if they had childcare expenses for a child under 13 and both spouses work or are full-time students. Unlike other tax credits, there are no restrictions based on income level. The tax credit is 20% for up to $3,000 of childcare expenses ($600) for families with one child and 20% for up to $6,000 of childcare expenses ($1,200) for families with two or more children.
Some families may not have taken advantage of this tax credit in the past because the name sounds familiar to the Child Tax Credit. However, this is a completely different credit families with children can take to reduce their federal income tax and has no bearing on whether a family is qualified to file Form 2441.
For more information about the Child and Dependent Care Expenses tax credit, or other ways to save money, visit our Expert Advice page.
March 27, 2013
April 15 is the tax deadline most Americans think of because it’s the final day to file personal income tax returns. However, for the majority of household employers, the month of April is also the when household employment tax returns (a.k.a. the “nanny taxes”) must be filed.
There are 2 deadlines approaching. The first is the federal 1040-ES deadline of April 15th. Household employers who paid wages to an employee during the first quarter of 2013 (January, February and March), should file Form 1040-ES and remit all of the federal taxes withheld from the employee’s pay (Social Security, Medicare and any federal income taxes) along with the associated federal employer taxes (Social Security, Medicare and Federal Unemployment).
The second deadline is with your state. In most states, household employers are required to file employment tax returns for the first quarter of 2013 by the end of April. The state returns include remittance of the state taxes withheld from the employee’s pay along with all of the state employer taxes.
The employment tax process funds important benefits and protections for the employee, including Social Security income, health insurance coverage via Medicare and unemployment benefits.
For Breedlove clients, no worries. We handle all these quarterly deadlines for you as part of our no-work, no-worry promise. If you’re not a Breedlove client and would like to learn more about the upcoming tax requirements, feel free to call and speak with one of our household payroll & tax experts. We’re here to help!
March 13, 2013
You may have seen Stephanie Breedlove featured in a Wall Street Journal story recently about “nanny tax amnesty.” The technical term the IRS is using is Voluntary Classification Settlement Program (VCSP) and this is very relevant to the household employment industry. In our experience, there are 2 common mistakes families make when hiring a household employee:
1) Misclassifying an employee as an “independent contractor” by giving them a Form 1099. (Worker misclassification is considered tax evasion for the family, increases the employee’s tax rate and limits her benefits).
2) Failing to withhold taxes and report wages properly. (Also known as “paying under the table,” the IRS considers this tax evasion too. It carries similar risk for the family and denies all benefits to the employee).
The VCSP helps with the first mistake because it is designed to allow employers who have misclassified their employee to come clean with very minimal penalties compared to what the IRS usually levies. By filling out the appropriate forms and paying the subsequent penalty, the employer agrees to treat the “independent contractor” as an employee moving forward and is not subject to an IRS audit. To take advantage of this amnesty offer, you must file by June 30, 2013.
For families currently paying “under the table,” Breedlove & Associates is happy to provide a simple, cost-effective solution that serves as an “amnesty program.” Lobbying on behalf of clients, we have an excellent track record of getting penalties waived for first-time offenders. As with any tax matter, it is much cheaper and easier to rectify a mistake if you come forward prior to an audit – and these “nanny tax” mistakes are prime examples of that IRS philosophy.
March 8, 2013
President Obama and Congressional leaders from both political parties have put immigration reform very high on the priority list – and most experts predict that comprehensive legislation will pass in the coming months.
This will have a significant impact on the household employment industry since the Department of Labor estimates that approximately 1 million of our 12 million illegal immigrants work in the domestic service industry.
Although several elements of the bill are still being debated, all parties agree that the path to citizenship will be paved by the payment of taxes. Those who want to stay in the country and earn the right to become a United States citizen will be required to prove that they’ve paid – and are continuing to pay – their fair share of taxes.
We’ll be watching the legislative process closely so we can inform families on the new law – and guide them through the steps of putting an undocumented nanny or housekeeper “on the books.”
February 22, 2013
Paying taxes tends to invoke negative feelings for most people. Fortunately for household employers, there’s a silver lining on your gray tax cloud – tax breaks. As long as you and your spouse are working or are a full-time student and have at least one child under 13, you’re in a great position to make back most, if not all, of your nanny taxes. Here are two ways you can save:
1) Dependent Care Flexible Spending Account. Many companies offer their employees the option to set aside up to $5,000 of their pre-tax earnings into a Dependent Care Account to pay for childcare expenses. This means there is no federal or state income tax, Social Security tax or Medicare tax on $5,000 of either you or your spouse’s income. Depending on your state and your tax bracket, this deduction will save you anywhere from $2,000 to $2,300 per year.
2) Child Care Tax Credit. If you don’t have access to a Dependent Care Account, you can claim the Tax Credit for Child or Dependent Care (IRS Form 2441) on your federal income tax return at year end. If you have one child, you can save up to $600 per year (20% on up to $3,000 in childcare expenses). If you have two or more children, your savings will be up to $1,200 per year (20% on up to $6,000 in childcare expenses).
Great News! If you have two or more children under the age of 13, you can use a combination of these two tax breaks in order to achieve a maximum of $2,500 in tax savings.
For many families, the tax breaks will offset a large portion of the employer tax costs. This is especially true for those employing someone on a part-time, seasonal or NannyShare basis. For a more fine-tuned estimate of how much your family can save from tax breaks, use the free Nanny Tax Calculator at www.breedlove.com.
February 15, 2013
Hiring a full-time, experienced nanny to provide exceptional care for your children can be a daunting expense, especially for first-time household employers. Not only do you have to budget for the nanny’s wages, but also your employer taxes (Social Security, Medicare, state unemployment, etc.). But if you partner up with another family in a similar situation, you can enter into a nanny-share and split the costs.
NannyShares are becoming more popular, but both families need to be on-board with their household employer requirements for it to work professionally and legally. Both families need to document paying the nanny and be set up with the IRS and state as household employers.
The good news is, once the families have their NannyShare set up, they can both take advantage of tax breaks to offset their household employer costs – and many even come out ahead. To check out your savings and learn more about childcare tax breaks, visit our free nanny tax calculator.